Right Shares

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

22 June 2010 Hi
Members

Will any one comes to know me.

1. What is the meaning of Right Shares with example?

2. Why Company Issue Right shares?

3. What is the benefit for company and investor by right shares?

CMA. CS. Sanjay Gupta

CMA. CS. Sanjay Gupta (Expert)
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22 June 2010 Issue of Rights

An issue of securities to the existing shareholders with the right resting on the investor either to accept or reject the offer.

A corporation/company usually offers a rights issue to the existing shareholders an option to buy new shares of the company at a predetermined price usually at a discount to the existing market price in a pre fixed ratio.

A rights issue will be of the form, issue of x number of shares to the existing shareholders at a price of y per share in the ratio of n shares for every y shares held as on date D.

A rights issue has the following effects on the price of a stock.

1. Share capital gets increased according to the rights issue ratio.
2. Liquidity in the stock increases.
3. Effective Earnings per share, Book Value and other per share values stand reduced.
4. Markets take the action usually as a favorable act.
5. Market price gets adjusted on issue of rights shares.
6. Company gets better cash flow which may be used to improve the business and may help increase effective Earnings per share.
7. Usually a shareholder may not back out from applying for the rights issue unless the offer is almost same as the prevailing market price. This is because if a stock is trading at 100 and a rights issue in the ratio 1:1 at a price of 40 will make the stock trade at 70 soon after the ex-rights date.

CMA. CS. Sanjay Gupta

CMA. CS. Sanjay Gupta (Expert)
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22 June 2010 As for benefits to the investor, the only benefit they might have is that the company may issue the shares at a price lower than the current market price. If you trust your company's long-term prospect, you can hold them for longer term. Otherwise, you can play with them. Buy some shares from market before company's record date comes. Become eligible to apply for rights shares and apply for them. Then sell the shares before new shares are allotted. You will anyhow get new shares at a lower price.

Ankur Garg

Ankur Garg (Expert)
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23 June 2010 Kindly go through the link below:

https://www.caclubindia.com/articles/procedure-for-issue-of-right-shares-with-letter-of-offer-2777.asp

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